How to Estimate Bad Debt Expense

One other important journal entry you need to understand to get the most out of QuickBooks 2012 when working with accounts receivable is how to estimate bad debt expense.

Journal Entry 3: Recording an Allowance for Uncollectible Accounts

Account

Debit

Credit

Bad debt expense

100

Allowance for uncollectible A/R

100

Journal Entry 3 records an estimate of the uncollectible portion of accounts receivable. (Businesses that don’t want to keep accrual-based accounting statements may not need to worry about Journal Entry 3.) Unfortunately, some of the money you bill customers may be uncollectible. Yet Journal Entry 1 records every dollar that you bill your customers as revenue.

Therefore, you need a way to offset, or reduce, some of the sales revenue by the amount that ultimately turns out to be uncollectible.

Journal Entry 3 shows a common way of doing this. Journal Entry 3 debits bad debt expense — which is an expense account that you may use to record uncollectible customer receivables. Journal Entry 3 also credits another account shown as allowance for uncollectible A/R.

This allowance account is called a contra-asset account, which means it basically reduces the balance reported on the balance sheet of an asset account. In the case of the allowance for uncollectible A/R accounts, for example, this $100 credit reduces the accounts receivable balance shown on the balance sheet by $100.

Where the bad debt expense shown in Journal Entry 3 appears varies from business to business. Some businesses report the bad debt expense with the other sales revenue, thereby allowing the income statement to show net sales revenue. Other businesses report bad debt expense with the other operating expenses. You should report bad debt expense wherever it makes most sense in terms of managing your business.

QuickBooks doesn’t automatically record the transaction in Journal Entry 3. You record estimates of bad debt expense yourself by using the QuickBooks Make Journal Entries command.